Equitable Life: FSA response to Baird Report

Thank you for your letter about the report by our Director of Internal Audit into the FSAs regulation of Equitable Life from the beginning of 1999 until its closure to new business in December 2000. I note that the report has been presented to Parliament.

As you say, the report does not pretend to be a comprehensive analysis of the full background to the current position of the society. But it makes some important recommendations about the future regulation of life insurance, which you ask us to take forward as a matter of urgency. In particular you note the conclusions that the FSA should take a more proactive approach in future, and you ask us to submit a full report, approved by my Board, by 20 November, as our response. We will be pleased to do so, and to explain in detail how we plan to carry forward all the recommendations.

We recognise that the review makes pertinent criticisms of various aspects of the management of both the prudential and conduct of business regulation of Equitable Life by the Authority. With the benefit of hindsight it is clear that a number of issues could have been better handled, and we will take those lessons to heart. But my Board also notes the conclusion that, by 1 January 1999, the die was cast and nothing which the FSA could have done thereafter would have mitigated, in any material way either the outcome of the Court case or the final outcome as far as Equitable Life is concerned.

Some of the issues to which the report draws attention have already been addressed. The Annex to this letter lists the main relevant changes we have made over the last year. The most important bringing prudential and conduct of business regulation together - was in our plans for this year, and was implemented in April. But there is much more work to do, particularly on prudential standards and regulatory reporting. The Annex also lists the main projects now underway. The Board have asked John Tiner, our new Managing Director now principally responsible for insurance supervision, to take this work forward. We will, of course, also take account of any further recommendations made by Lord Penrose, who will now carry out the full investigation of the past, including the actions of the Society over the years, which our review could not cover.

Annex

a) Changes already made by the FSA

A significant number of improvements to the insurance regulatory regime have already been made or will come into effect from 1 December. In particular, FSA has:

• launched a review of with profits policies, including disclosure, governance and discretion;

• brought together, into the same FSA Divisions, both prudential regulation and conduct of business regulation of life insurance companies;

• reallocated responsibility for the supervision of the nine largest insurance companies (representing over 50% of the life insurance market) to our Major Financial Groups Division which oversees other large firms (including banks and major securities houses);

• developed a pro-active, risk-based approach to regulation which is being progressively applied to the insurance sector;

• integrated the provision of actuarial advice (formerly in the Government Actuary's Department) with the work of the supervisors;

• moved responsibility for policy on prudential issues for all financial sectors (including insurance) into a new Prudential Standards Division, and

• designed a new regulatory regime for Lloyd's.

b) Planned Project Work Streams in response to the Equitable report

1. A review of prudential standards for life and general business, including solvency requirements, insurance risk management, legal risk, credit derivatives and liquidity;

2. A review of regulatory reporting and disclosure of information to the FSA;

3. An examination of the role in insurance regulation of professional advisers and skilled persons, including auditors, the Appointed Actuary and actuarial Quality Assurance;

4. An overhaul of conduct of business and other requirements designed to ensure the fair treatment of customers (including the governance of insurance companies); and

5. A re-examination of all relevant aspects of our regulatory processes, with particular emphasis on proactive risk identification and mitigation, and the use of appropriate regulatory tools.

Notes for editors

1. The Baird Report, "The Regulation of Equitable Life an independent report" prepared by Ronnie Baird, Director, Quality Assurance and Internal Audit, FSA, assisted by Norton Rose and PricewaterhouseCoopers, is published by the Treasury (www.hm-treasury.gov.uk) and copies are available from The Stationery Office.

2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

3. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.